Saving

Too many households are one unplanned expense away from financial ruin. At least one in four Americans are in this precarious situation and classified as asset poor, meaning they lack sufficient financial resources (savings, home equity, or other asset) to subsist for three months if their current income were suspended.

For workers experiencing "too much month at the end of the paycheck," to borrow Peter Skillern's phrasing, without a rainy-day fund to tap for the unplanned expense, individuals have few options other than to take on a high cost loan and amass unsecured debt which can undermine a household's financial stability in the short, medium and long-term.

Each year the U.S. Treasury Department issues over one-hundred million refunds worth billions of dollars to individual tax filers.

Almost half of all refunds are issued via a paper check, with the majority of those checks being mailed to lower-income households. This presents a scaleable opportunity to provide these households with a low-cost transaction and savings account on the tax form.

IRS data show that of the 60 million federal tax refunds that were issued via a paper check in 2005, almost half were mailed to households earning $30,000 or less. These are the very households who typically lack access to reasonably-priced financial services and who are most likely to pay a disproportionate amount of their income to conduct routine financial transactions. They are also less likely to have adequate savings to cover emergency expenses like car repairs or unexpected medical bills, which often leads to payday lenders and other expensive sources of credit.

These households do, however, receive on average about $1,700 in federal tax refunds. And when examined in the aggregate, almost $50 billion is annually refunded to households with AGIs of $30,000 or less, via paper check.

The potential of those refunds as deposits creates a powerful case for financial institutions to make a low-cost transaction and savings product available to lower-income consumers.

Last week I had the privilege of discussing asset building for lower income Americans in three very different settings: the annual Opportunity Economics Colloquium of the Hope Street Group, held at the Lansdowne Resort outside of Washington; an Assets Forum sponsored by the New America Foundation in the State Capitol in Sacramento, California; and with a group of financial services, social service and foundation representatives brought together by the City of Seattle. While the settings and audiences varied, the theme was the same: how to empower and encourage all Americans, particularly those who do not have funds either to cushion an economic setback or to invest to achieve economic security, to take sustainable first steps toward saving. Given the current financial crisis, one wishes these discussions had started ten years ago, but that same crisis makes it all the more important that they're happening now.

Imagine giving a drug addict more drugs, a drunk another drink, or a smoker another cigarette. Well, that’s exactly what Congress and the President seem eager to do with our nation’s addiction to spending: give us quick and easy cash. That fix will feel good (Wow, nice iPhone!), boost our confidence and, the plan goes, stimulate our slumping economy.

That addiction is about to get another hit as the long-awaited rebate checks arrive in a few weeks. The widely held view, of course, is that more spending will boost our confidence and, thus, the economy. But a cloud will hang over our high because we know that more spending further postpones the inevitable, and makes even harder what we know we must do to restore our nation’s long-term health: We must start saving again.

Who needed to save when the booming housing and stock markets, combined with increasingly easy cash for homes and consumer goods, made us feel like there was a never ending supply of money? But then we burned through literally trillions of dollars of home equity, home values plummeted, credit markets collapsed, and now we’re dangerously dependent on Chinese investors and Sovereign Wealth Funds to keep us afloat.

Although many people dread the April 15 deadline to file their taxes, for millions of working families, tax time represents a potential lucrative asset building opportunity. Families, who are eligible for the earned income and other tax credits, can receive a lump sum of several thousand dollars and there are a growing number of options to use this lump sum to build assets.
The Earned Income Tax Credit (EITC) represents the country's largest, most effective anti-poverty programs. Every year approximately 20 million workers claim about $30 billion through the program lifting five million of them above the poverty line. For many families, tax refunds are the single largest lump sum of cash received each year.

Many workers regard this lump sum as a forced savings strategy. The average income tax refund is approximately $2,000 and although many of these families need their refund to help pay for basic living expenses, the lump sum can also be used as an opportunity to save and build assets. The lump sum could be used to establish an emergency fund, to pay down consumer and other forms of debt, to fund the down payment of purchasing a home, or to build long-term savings.